Education and Employment References Committee

The exploitation of international student visa workers at 7-Eleven

9. 
   On 31 August 2015, a joint investigation by Four Corners and Fairfax Media revealed the deliberate falsification of employment records by employers (franchisees) and the systemic underpayment of the wages and entitlements of international students working on temporary visas in many 7-Eleven convenience stores across Australia. Along with several former employees of 7-Eleven, the investigation was assisted by, amongst others, Mr Michael Fraser, a business and consumer relationship advocate, and Mr Stewart Levitt, a class action lawyer at Levitt Robinson Solicitors.⁶²
   
10. 
    The committee held three public hearings on matters related to 7-Eleven in Melbourne on 24 September and 20 November 2015, and in Canberra on 5 February 2016.
    
11. 
    The remainder of this chapter deals with the evidence from those hearings. It begins with an overview of the 7-Eleven business model, followed by sections on the recruitment and underpayment of international student visa holders at 7-Eleven. This is followed by a discussion of the response from 7-Eleven including the establishment of the independent Fels Panel, the new franchise agreement between 7-Eleven and its franchisees, the Fels Panel claims process, and the barriers to claimants coming forward. The chapter finishes by looking at the respective responsibilities of the franchisor and franchisee and issues relevant to the Franchising Code of Conduct (Franchising Code). The FWO inquiry into 7-Eleven is covered in chapter 9.
    

60. 
    Shop, Distributive & Allied Employees' Association, answer to question on notice, 24 September 2015 (received 30 October 2015).
    
61. 
    Shop, Distributive & Allied Employees' Association, answer to question on notice, 24 September 2015 (received 30 October 2015).
    
62. 
    Adele Ferguson and Klaus Toft, '7-Eleven: The price of convenience', Four Corners, Australian Broadcasting Corporation, broadcast 31 August 2015.
    

7-Eleven history and the business model

217

9. 
   The hearing in Melbourne on 24 September 2015 was attended by Mr Russell Withers, a joint shareholder in 7-Eleven Stores Pty Ltd (7-Eleven) and Chairman of 7-Eleven until his resignation from the board on 1 October 2015.⁶³
   
10. 
    Mr Withers signed a licence agreement in 1976 with 7-Eleven in the United States (US) to bring 7-Eleven to Australia with the first stores opening in 1977. As at 24 September 2015, there were 620 7-Eleven stores in Australia operated by 458 independent franchisees, all operating under their own company structure.⁶⁴
    
11. 
    The 7-eleven franchise agreement works on a split of merchandise gross profit. At the time of the public hearing in Melbourne on 24 September 2015, 7-Eleven retained 57 per cent share of the gross profit and the franchisee received 43 per cent.⁶⁵
    
12. 
    The allocation of costs between the franchisor and the franchisee was as follows. 7-Eleven's 57 per cent share of the gross profit paid for:
    

• 
  the rent or the provision of the store;
  
• 
  the equipment in the store;
  
• 
  the maintenance of buildings, premises and equipment;
  
• 
  the cost of utilities such as power;
  
• 
  advertising; and
  
• 
  an optional payroll service that relied on information provided by the franchisee.⁶⁶
  

9. 
   The franchise agreement established the franchisee as an independent contractor. From the franchisee's 43 per cent share of gross profit, the franchisee was responsible for:
   

• 
  hiring and remunerating all staff in the store;
  
• 
  store supplies; and
  

63. 
    7-Eleven Stores Pty Ltd is privately owned by Mr Russell Withers, his sister Mrs Beverley Barlow, and their spouses (7-Eleven, About Us, (accessed 25 February 2016)). See also Adele Ferguson and Sarah Danckert, 'Russ Withers resigns from 7-Eleven board, CEO Warren Wilmot also stands down', The Sydney Morning Herald,
    

1 October 2015, (accessed 2 October 2015).

63. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 46.
    
64. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 46.
    
65. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 46.
    

218

• 
  expenses such as telephone, janitorial costs and supply items such as paper bags.⁶⁷
  

9. 
   The balance after the franchisee has subtracted wage costs and other expenses from the 43 per cent split of gross profit is the franchisee's net income.⁶⁸
   
10. 
    A key point of contention in the 7-Eleven scandal was the extent to which 7-Eleven was itself responsible for the problems across its network of stores. Several submitters and witnesses stated that the 7-Eleven business model placed franchisees in an invidious position where the only way that most franchisees could make money was by breaking workplace laws and underpaying their workers. In other words, even though it was the franchisees that were directly responsible for underpaying their employees, the ultimate responsibility had to lie with 7-Eleven because their business model underpinned the systemic abuse of workplace law.
    
11. 
    As the 7-Eleven scandal broke in the media, Professor Allan Fels, a former chairman of the Australian Competition and Consumer Commission (ACCC), had examined the 7-Eleven business model and stated publicly that the only way that the 7-Eleven business model could work for the franchisee was if they underpaid or overworked their employees:
    

My impression – my strong impression – is that the only way a franchisee can make a go of it in most cases is by underpaying workers, by illegal behaviour. I don't like that kind of model.⁶⁹

9. 
   When the committee put this to 7-Eleven, Mr Withers emphatically rejected it, stating that the 7-Eleven model had a 38 year track record as 'a very viable system':
   

Whilst I respect Professor Fels enormously, I would submit that he really does not have the information to be able to make that judgement.

9. 
   As at 31 December 2015, 7-Eleven had 626 stores. Eight of these stores were operated by 7-Eleven, with the remainder operated by a total of 442 Franchisees. 7- Eleven provided the modelling of labour costs based on advice by employment consultants, ER Strategies and consultation with 7-Eleven franchisees:
   

• 
  the average cost per hour (before associated on-costs) of operating an optimised roster would be $25.04 per hour in a non-fuel store and $21.97 per hour in a fuel store;
  
• 
  the minimum number of staff that would be required to operate a store would average at 1.1 full time equivalent (FTE) for each shift per week over the
  

67. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 46; see also 7-Eleven, Frequently asked questions, 'Investment: what ongoing costs do I need to pay as a 7-Eleven franchisee?, (accessed 1 March 2016).
    
68. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 46.
    
69. 
    Professor Allan Fels, Sydney Morning Herald, video, (accessed 2 February 2016).
    

219

course of a year. (This staff number includes appropriate allowances for administration and management time, ordering and receiving stock, shift overlaps and promotional changeovers);

• 
  the average minimum weekly cost of operating a non-fuel store is 168 hrs per week x $25.04 per hour x 1.1 FTE = $4645.87 per week (before associated on-costs); and
  
• 
  the average minimum weekly cost of operating a fuel store is 168 hrs per week x $21.97 per hour x 1.1 FTE = $4060.06 per week (before associated on-costs).⁷⁰
  

9. 
   Based on these figures, the average minimum annual cost of operating a non- fuel store would be $241 585 and of a fuel store would be $211 123. In addition, the franchisee has associated on-costs such as leave accruals, superannuation and workers compensation, as well as expenses such as telephone, janitorial costs, supply items such as paper bags, and interest on the business loan.
   
10. 
    Yet documents seen by the joint Four Corner-Fairfax Media investigation showed that about 140 7-Eleven stores across Australia generated a gross profit of
    

$300 000 or less a year for the franchisee.⁷¹

9. 
   A second and related point of contention between 7-Eleven and other submitters and witnesses was over whether the problems at 7-Eleven were systemic, or merely a matter of a few rogue franchisees.
   
10. 
    Mr Ullat Thodi declared that the problem of exploitation at 7-Eleven was systemic, but that international students were terrified to come forward because of their fears of deportation:
    

I believe it is systemic, because I do have mates who worked in Perth, in Brisbane, in Sydney and in Melbourne; I am from Geelong, and still there are people working there who are my mates, at a little less than $12. I still have a mate in Perth right now who started on $8 and went up to $10; I think now he is on $14. It is still happening right now, everywhere. They are all scared to stand up because of the 20 hour work limit. I believe that if Immigration say in the newspaper that the 20 hour limit does not apply, people will just run in behind it, and you could get thousands of people right now saying, 'Yes, I have been underpaid.'⁷²

9. 
   Mr Fraser stated that he had contacted Mr Warren Wilmot, the then Chief Executive Officer (CEO) of 7-Eleven, with evidence that the wage scam was systemic at 7-Eleven and that the problem could only be solved by 7-Eleven Head Office:
   

This is what I said to Warren Wilmot in my email, I think several times: if it was one store, I could see why you would say it is not the problem, or if it

70. 
    7-Eleven, answer to question on notice, 5 February 2016 (received 16 February 2016).
    
71. 
    The Sydney Morning Herald, (accessed 2 February 2016).
    
72. 
    Mr Mohamed Rashid Ullat Thodi, Committee Hansard, 24 September 2015, p. 6.
    

220
was two, or maybe even if it was one state; but how does an Indian franchisee in Melbourne and a Pakistani franchisee in Sydney and a Chinese franchisee in Brisbane all know the same scam, and, when you talk to every worker, how do they know that that is just the 7-Eleven model?

So I said to him: 'If this going on, it is systemic and it's not something that can be fixed with a Fair Work complaint or by reporting the franchisee; it is something that must come from head office. They must fix it there, because it's systemic.'⁷³

9. 
   Following the Four Corners program, Mr Fraser was contacted by many franchisees. According to Mr Fraser, one of the franchisees admitted the underpayment model was systemic across 7-Eleven:
   

Listen, we all underpay. It is essentially what we signed up to. We bought into the model. We all knew what we were getting into. That is the 7-Eleven model.⁷⁴

9. 
   However, the franchisee was unhappy that in the subsequent media glare, 7-Eleven expected the franchisees to pay the correct wages when some of them could not make the model work without underpaying:
   

They are not happy that 7-Eleven are turning around and saying, 'Now the media are watching, you have got to start doing the right thing—but, don't worry, this will all blow over in a few months and you can go back to business.' A couple of weeks ago, one guy from Surfers Paradise packed up and left. He said, 'If I've got to pay the wages properly, I can't afford to survive.' So he abandoned the store and went back overseas.⁷⁵

9. 
   The argument that underpayment at 7-Eleven was systemic was supported by evidence from the Fels Panel. Despite franchisees actively deterring employees from coming forward, Professor Fels noted that 60 per cent of 7-Eleven stores had a claim for underpayment against them. Furthermore, Professor Fels was strongly of the view that more stores should have a claim against them, but employees were being threatened by their employers.⁷⁶
   
10. 
    The third and related point of disagreement between 7-Eleven and other submitters and witnesses was the claim by 7-Eleven that they were unaware of the extent of the problem and that it had taken them by surprise. For example, Mr Withers stated that 7-Eleven had been 'blindsided by the level of underpayment', that 7-Eleven was not aware of the extent of the problem, and that he hoped 'that this is in a minority of franchisees'.⁷⁷
    

73. 
    Mr Michael Fraser, Committee Hansard, 24 September 2015, p. 15.
    
74. 
    Mr Michael Fraser, Committee Hansard, 24 September 2015, p. 17.
    
75. 
    Mr Michael Fraser, Committee Hansard, 24 September 2015, p. 17.
    
76. 
    Professor Allan Fels, Fels Wage Fairness Panel, Committee Hansard, 5 February 2016, pp 27 and 28, and 29–30.
    
77. 
    Mr Russell Withers, Chairman, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, pp 49 and 52.
    

221

9. 
   Likewise, Ms Natalie Dalbo, the former General Manager Operations at 7-Eleven claimed 7-Eleven was not aware of pervasive underpayment. She stated that based on its audit history, 7-Eleven believed the practice of underpayment was restricted to a few franchisees:
   

I think if we look through the timeline of audits that have been undertaken by the Fair Work Ombudsman, there was certainly an indication in 2009 that five stores had been found underpaying, through that audit process. At the time of those audits, we genuinely did not believe the practice was widespread, and we worked with the FWO to put in place the appropriate measures to ensure that our franchisees were educated on their responsibilities as employers, and that they were provided and afforded the correct compliance training to meet those obligations.

…

In 2009 there was a joint audit that was undertaken by 7-Eleven and the Fair Work Ombudsman. Again, there were 17 stores out of 56 that had recorded contraventions. Those contraventions varied from evidence of underpayment in some of those 17 stores, to paperwork and payslip contraventions as well. So again, of the 56 stores, there were 17 where there were findings, and we did put in place some increased focus on education and training, and that 2010 audit led to the introduction of what we call our 'retail review program', where we audited payroll compliance.⁷⁸

9. 
   However, given the systemic nature of wage exploitation occurring across almost all 7-Eleven stores and in every state in which 7-Eleven operated, submitters and witnesses struggled to believe that 7-Eleven Head Office were unaware that the half-pay model existed.⁷⁹
   
10. 
    The committee put it to 7-Eleven that Head Office had used the franchise structure to insulate itself from any knowledge of underpayment (and the associated risks and liabilities):
    

I think it has been described as a very thin veil between your organisation, at the head office level, and the actual franchise structure, which has provided with you a degree of plausible deniability of knowledge…⁸⁰

9. 
   In response, Mr Wilmot, the then CEO of 7-Eleven rejected this assertion.⁸¹
   

78. 
    Ms Natalie Dalbo, General Manager Operations, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 49.
    
79. 
    See, for example, Mr Gerard Dwyer, National Secretary and Treasurer, Shop, Distributive and Allied Employees Association, Committee Hansard, 24 September 2015, p. 26; Mr Michael Fraser, Committee Hansard, 24 September 2015, p. 15.
    
80. 
    Senator O'Neill, Committee Hansard, 24 September 2015, p. 53.
    
81. 
    Mr Warren Wilmot, Chief Executive Officer, 7-Eleven Stores Pty Ltd, Committee Hansard, 24 September 2015, p. 53.
    

222